Business Loan Insurance is a policy designed to protect businesses and their owners in the event of death or critical illness of a key person. Unlike key person insurance, business loan protection is specifically designed to cover a loan amount taken out by the company. This could be in the form of a commercial mortgage or a simple commercial loan, such as a bridging loan.
The protection is often requested by the lender in order to cover the full loan amount and will often form part of the commercial loan agreement.
Some lenders will insist on key people taking out business loan protection insurance in order to make sure the outstanding debts can be repayed in the event of death or critical illness or terminal illness of key people. More and more lenders are asking for this type of cover to be in place before they release funds.
In the UK, imagine if someone crucial to your business falls seriously ill or, heaven forbid, passes away before you’ve settled all your debts. The money needed to cover those debts might have to come from your business’s own pockets. And that could seriously shake up your company’s financial health and eat into your profits.
But here’s the good news: with Business Protection, you can shield your business from financial chaos if the unexpected strikes. So, you’ve got a safety net in place to keep your business on a steady financial path even when life throws you a curveball.
Business loan insurance works by providing financial cover for the outstanding balance of a business loan in the event of the death, disability, or critical illness of the business owner or key person.
When a business takes out a loan, the lender will typically require the business to provide collateral, such as property or equipment, to secure the loan. Business loan insurance is an additional form of collateral that can be used to secure the loan.
Here’s how business loan protection works:
It’s important to note that the terms and conditions of the policy, the eligible criteria, and the claim process can vary between providers. It’s recommended to consult with a financial advisor or insurance broker to determine the appropriate type of loan protection insurance and the coverage amount needed for the business.
It’s also important to read the policy and check for any exclusions or limitations, such as pre-existing medical conditions, and to make sure that the policy is suitable for your business.
Legally speaking, you’re not obliged to have business loan protection in place when you taking out commercial loans. But here’s the deal: lots of lenders and venture capital providers will often ask for it. They want the reassurance that you’ve got a safety net to make those loan repayment, and it helps them feel more confident about lending to you. So, it’s not a must, but it’s often a smart move to have it in your corner.
Now, think about this: Picture one of the key people responsible for paying back a business debt falling seriously ill or passing away. When that happens, some creditors might knock on your door, demanding the debt to be cleared immediately. For businesses without protection, this could spell trouble. If you can’t manage to pay up, you’re at risk of becoming insolvent, and that’s not where any business wants to be. So, protecting your business can be a smart move and one you seriously need to consider when taking out business loans.
In the UK, there are two main types of business loan protection insurance: level term and decreasing term.
Level term business loan protection provides a fixed benefit amount for a set period of time, regardless of the outstanding loan balance. This type of insurance is typically used to cover a business loan that has a fixed term, such as a mortgage or a term loan. This type of insurance will provide a lump sum benefit in case of a claim, which can help the business to continue servicing the loan and avoid defaulting on the loan.
Decreasing term business loan protection, on the other hand, provides a benefit amount that decreases over time, in line with the decreasing balance of the loan. This type of insurance is typically used to cover a business loan that has a variable rate, such as a revolving credit facility or a business loan that has a variable term. The benefit amount decreases over time, as the loan balance decreases.
The choice between a level term or decreasing term business loan protection will depend on the specific needs of the business or the lender.
It’s important to consult with a financial advisor or insurance broker to determine the appropriate type of loan protection insurance and the coverage amount needed for the business.
Ultimately, Business Loan Protection is a great way to ensure that your investment is covered in the long-term. It’s important to weigh up all the pros and cons before committing to any policy, but if you do decide to take out a plan then you can rest assured that your funds will have additional security against unforeseen circumstances.
Yes, in the UK it is possible to put business loan protection into a trust.
A trust is a legal arrangement where a trustee holds assets on behalf of a beneficiary. Trusts can be used for a variety of purposes, including tax planning, estate planning, and asset protection.
When a business loan insurance policy is placed in a trust, the trustee is responsible for managing the policy and the proceeds of the policy. In the event of a claim, the proceeds of the policy will be paid to the trustee and then distributed to the beneficiaries of the trust according to the terms of the trust.
There are a few different types of trusts that can be used to hold business loan protection, such as a bare trust or a discretionary trust.
It’s important to note that trusts can be complex legal arrangements, and it’s recommended to consult with a financial advisor, insurance broker and a lawyer to determine if a trust is the appropriate vehicle for holding business loan protection and to set up the trust in a proper way
In the UK, the tax treatment of business loan protection insurance will depend on the specific circumstances of the policy and the business. Here are a few key points to consider:
Premiums: The premiums paid for business loan protection insurance are generally considered to be tax-deductible business expenses. This means that the business can claim a deduction for the premiums when calculating its taxable income.
Claims: The proceeds of a business loan protection claim are generally considered to be tax-free. This means that the business will not be subject to income tax on the proceeds of a claim.
Trusts: If a business loan protection insurance policy is held in a trust, the tax treatment of the policy will depend on the type of trust and the terms of the trust. It’s important to consult with a tax advisor to determine the tax implications of holding a business loan protection insurance policy in a trust.
Value added tax (VAT): If the business is VAT registered, it will be able to recover the VAT on the premium.
It’s important to keep in mind that tax laws and regulations are subject to change and can vary based on the specific circumstances of the business. It’s recommended to consult with a tax advisor to determine the tax implications of business loan protection insurance for your specific business.
This all depends on the requirements of the commercial lender. Normally a straigh forward life insurance policy will surfice, but its worth checking with the lender to make sure.
This will also depend on the requirements of the lender. A comercial mortgage may be up to 25 years for example.